Wednesday, May 07, 2008

Coase and the First Amendment

It seems odd that the law distrusts the judgments of citizens in ordinary commercial transactions so much more than their judgments in political transactions. The law stringently regulates the quality of drugs, food, cars, and consumer products generally on the theory that consumers are not capable of accurately evaluating these products for themselves. But the First Amendment prohibits similar regulation of the political marketplace, apparently on the theory that ignorance can more easily be tolerated with matters like nuclear war and fiscal crisis than with matters like the purchase of a tube of toothpaste.

At the very least, should the law sanction blatantly misleading political statements more aggressively? Should there be an FTC of political ads?

After pointing out the stark contrast between government regulation of the economy (widespread) and government regulation of speech and ideas (rare and difficult to sustain), Coase asks:

The paradox is that government intervention which is so harmful in the one sphere becomes beneficial in the other. The paradox is made even more striking when we note that at the present time it is usually those who press most strongly for an extension of government regulation in other markets who are most anxious for a vigorous enforcement of the First Amendment prohibitions on government regulation in the market for ideas.

What is the explanation for the paradox? . . . The market for ideas is the market in which the intellectual conducts his trade. The explanation of the paradox is self-interest and self-esteem. Self-esteem leads the intellectuals to magnify the importance of their own market. That others should be regulated seems natural, particularly as many of the intellectuals see themselves as doing the regulating. But self-interest combines with self-esteem to ensure that, while others are regulated, regulation should not apply to them.

Coase goes on to argue that there is no logical or systematic reason to take a different approach in the idea market, which is subject to many of the same informational asymmetries, biases, rational ignorance, and market failures that characterize any other market:

In fact, if we do this and use for the market for ideas the same approach which has commended itself to economists for the market of goods, it is apparent that the case for government intervention in the market of ideas is much stronger than it is, in general, in the market for goods. For example, economists usually call for government intervention . . . when the market does not operate properly -- when, that is, there exist what are common referred to as . . . 'externalities.' If we try to imagine the property rights system that would be required and the transactions that would have to be carried out to assure that anyone who propagated an idea or a proposal for reform received the value of the good it produced or had to pay compensation for the harm that resulted, it is easy to see that in practise there is likely to be a good deal of 'market failure.' . . .

Or consider the question of consumer ignorance, which is commonly thought to be a justification for government intervention. It is hard to believe that the general public is in a better position to evaluate competing views on economic and social policy than to choose between different kinds of food. Yet there is support for regulation in the one case but not in the other.

Or consider the question of preventing fraud, for which government intervention is commonly advocated. It would be difficult to deny that newspaper articles and the speeches of politicians contain a large number of false and misleading statements; indeed, sometimes they seem to consist of little else. Government action to control false and misleading advertising is considered highly desirable. Yet a proposal to set up a Federal Press Commission or a Federal Political Commission modeled on the Federal Trade Commission would be dismissed out of hand.

In a later interview, Coase made clear that he was playing devil's advocate here:

TH [Tom Hazlett]: What about your article on the market for goods and the market for ideas in the American Economic Review in 1974? You created quite a stir with this and were interviewed by Time magazine. What did you say in that article, and why was it so controversial?

RC: It was controversial because I said that the arguments for regulation of the market for goods and the regulation of the market for ideas are essentially the same, except that they’re perhaps stronger in the area of ideas if you assume consumer ignorance. It’s easier for people to discover that they have a bad can of peaches than it is for them to discover that they have a bad idea.

TH: So if you think that the consumer, ignorant as he is, ought to be protected by a government regulator, then you should really believe that the government regulator ought to step in and police the speech of professors or politicians or pundits.

RC: That’s right. If the government is competent to do the one, it’s competent to do the other.

TH: Then there ought to be a federal philosophy commission.

RC: That’s right. The press was horrified by the idea. If the argument is exactly the same for regulating the press as for regulating peaches, this meant that I was arguing for regulation of the press.

TH: You have to be careful with reductio ad absurdum arguments.

RC: As they assumed that all regulation in the market for goods was fine, it never struck them that the argument was really the other way around.